Download PRINCIPLES 2010

Article 3.2.7 (Gross disparity)

(1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

(a) the fact that the other party has taken unfair advantage of the first party's dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and

(b) the nature and purpose of the contract.

(2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing.

(3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. The provisions of Article 3.2.10(2) apply accordingly.

COMMENT

1. Excessive advantage

This provision permits a party to avoid a contract in cases where there is gross disparity between the obligations of the parties, which gives one party an unjustifiably excessive advantage.

The excessive advantage must exist at the time of the conclusion of the contract. A contract which, although not grossly unfair when entered into, becomes so later may be adapted or terminated under the rules on hardship contained in Chapter 6, Section 2.

As the term “excessive” advantage denotes, even a considerable disparity in the value and the price or some other element which upsets the equilibrium of performance and counter-performance is not sufficient to permit the avoidance or the adaptation of the contract under this Article. What is required is that the disequilibrium is in the circumstances so great as to shock the conscience of a reasonable person.

2. Unjustifiable advantage

Not only must the advantage be excessive, it must also be unjustifiable. Whether this requirement is met will depend upon an evaluation of all the relevant circumstances of the case. Paragraph (1) of this Article refers in particular to two factors which deserve special attention in this connection.

a. Unequal bargaining position

The first factor is that one party has taken unfair advantage of the other party’s dependence, economic distress or urgent needs, or its improvidence, ignorance, inexperience, or lack of bargaining skill (sub-paragraph (a)). As to the dependence of one party vis-à-vis the other, superior bargaining power due to market conditions alone is not sufficient.

Illustration

A, the owner of an automobile factory, sells an outdated assembly line to B, a Governmental agency from a country eager to set up its own automobile industry. Although A makes no representations as to the efficiency of the assembly line, it succeeds in fixing a price which is manifestly excessive. B, after discovering that it has paid an amount which corresponds to that of a much more modern assembly line, is entitled to avoid the contract.

b. Nature and purpose of the contract

The second factor to which special regard must be had is the nature and purpose of the contract (sub-paragraph (b)). There are situations where an excessive advantage is unjustifiable even if the party who will benefit from it has not abused the other party’s weak bargaining position.

Whether this is the case will often depend upon the nature and purpose of the contract. Thus, a contract term providing for an extremely short period for giving notice of defects in goods or services to be supplied may or may not be excessively advantageous to the seller or supplier, depending on the character of the goods or services in question. Equally, an agent’s fee expressed in terms of a fixed percentage of the price of the goods or services to be sold or rendered, although justified in the event of the agent’s contribution to the conclusion of the transaction being substantial and/or the value of the goods or services concerned not being very high, may well turn out to confer an excessive advantage on the agent if the latter’s contribution is almost negligible and/or the value of the goods or services are extraordinarily high.

c. Other factors

Other factors may need to be taken into consideration, for example the ethics prevailing in the business or trade.

3. Avoidance or adaptation

The avoidance of the contract or of any of its individual terms under this Article is subject to the general rules laid down in Articles 3.2.11 to 3.2.16.

However, according to paragraph (2) of this Article, at the request of the party who is entitled to avoidance, the court may adapt the contract in order to bring it into accord with reasonable commercial standards of fair dealing. Similarly, according to paragraph (3) the party receiving notice of avoidance may also request such adaptation provided it informs the avoiding party of its request promptly after receiving the notice of avoidance, and before the avoiding party has reasonably acted in reliance on that notice.

After such a request by the other party, the party entitled to avoidance looses its right to avoid the contract and any earlier notice of avoidance becomes ineffective (see Article 3.2.10(2).

If the parties are in disagreement as to the procedure to be adopted, it will be for the court to decide whether the contract is to be avoided or adapted and, if adapted, on which terms.